How You Can Beat the Higher Taxes Coming Up

By Sasha Cekerevac, BA Published : November 13, 2012

As the realization that the political structure in America is steering far more leftward sets in, businesses and investors are beginning to fear the substantial increase in dividend and capital gains taxes. Many investors have been searching for dividend yield to sustain income due to the absence of adequate bond yields. This area of income generation, dividend yield, will most likely be hit extremely hard with the increase in tax rates. While corporate profits are at massive levels in absolute terms, the problem will be in delivering these gains to shareholders.

In lieu of raising the regular dividend yield, many corporations are looking to pay out their corporate profits in special, one-time dividend payments. The reason being that firms are looking to disperse corporate profits before the tax rates hit. If they were to simply raise the dividend yield, once the tax rates are increased, investors would lose a substantial amount of money to the government. By getting ahead of the dividend yield tax-rate hike with a special one-time payment, firms are able to disperse corporate profits using an advantageous method for investors.

Chart courtesy of www.StockCharts.com

We’re already seeing this from several firms, such as Wynn Resorts, Limited (NASDAQ/WYNN). While Wynn Resorts has paid out a special dividend over the last few years, I think part of the impetus to do so this year is to take advantage of the current lower tax rates on the dividend yield. The one-time $5.00 payment will be dispersed on December 21 to shareholders of record on November 23. (Source: “Wynn Resorts Rises After Declaring $5 a Share Dividend,” Bloomberg, November 2, 2012.)

Chart courtesy of www.StockCharts.com

Another firm that is dispersing corporate profits with a special one-time payment instead of increasing its regular dividend yield is NewMarket Corporation (NYSE/NEU). The company is dispersing $25.00 per share on November 27 to shareholders of record on November 7. (Source: “NewMarket Corporation Declares Special Dividend,” Business Wire, October 25, 2012.)

I think that we’ll see more firms pay out special payments, rather than increasing their dividend yield, to get ahead of the higher tax rates that will be coming down the pipeline. With corporate profits still at high levels, this is creating a conundrum for business executives. While many executives would like to hold onto corporate profits in case there are better business opportunities in the future, dispersing the cash now might be a better option for investors. Currently, with the lower tax rates on the dividend yield, I think many shareholders would most likely prefer to have the cash.